Hollywood Conducting First Independent Audit of China's Box Office

After years of U.S. studio concerns over a lack of transparency and possible ticket fraud, Hollywood is getting a closer look at the Chinese industry's books.

The Motion Pictures Association of America has hired an outside accounting firm to audit China's massive — but non-transparent — movie box office, a source with knowledge of the situation tells THR.

The results could help establish how much progress Chinese regulators have made in combating once rampant ticket sales fraud in the country, an issue that U.S. studio executives have complained about in private for years.

The MPAA is understood to have brought in an international firm to review sales of selected films, with the results expected as soon as the third quarter, says Bloomberg, which was the first to report the news. A representative for the MPAA declined to comment.

With China expected to surpass North America as the world's largest theatrical market sometime in the next five years, U.S. studios have grown increasingly reliant on strong returns from the Middle Kingdom to prop up the global performance of their biggest tentpoles. Case in point: Paramount's Transformers 5, which has earned nearly twice as much in China as North America since its release Friday.

But Chinese cinemas have been known to employ various techniques to game the system, such as the simple under-reporting of sales, ascribing profits from one film to another or selling discounted tickets to distributors in bulk to create the false appearance of a hit for marketing gain. As recently as 2013, industry experts believed that at least 10 percent of all Chinese box-office sales were lost to fraud.

Under mounting pressure from the MPAA and U.S. trade officials, China secretly relented in 2015 to a box-office audit by an international firm, sources told THR at the time. The concession was one of two agreements won from negotiations shrouded in secrecy during Chinese president Xi Jinping's state visit to the U.S. that year. The other accord was a plan to increase significantly the number of foreign films allowed into China on what's known as a flat-fee basis.

The latter of the two was the first to come to pass: In 2016, a total of 51 international movies were sold into China for a flat fee, compared with just 28 the year prior.

Now, it appears China's media regulators are making good on the promise of greater transparency, too.

Beijing has taken plenty of steps to clean up the exhibition sector on its own as well. Earlier this year, Chinese regulators punished 326 local cinemas for cooking the books — the first major enforcement of a new national film law, which went into effect March 1.

Insiders say the recent rise of powerful digital ticketing platforms in China — which account for over 80 percent of all movie tickets sold in the country — also has made fraud more difficult to execute and conceal. Some of the most popular platforms, such as Weying and Alibaba's Tao Piao Piao service, publicly disclose box-office data on a regional, or even cinema-by-cinema, basis — often in real time.

The new Hollywood audit is believed to be involved in setting the stage for the renegotiation of the U.S. film industry's terms of doing business in China. The previous five-year trade framework — which covered everything from how many U.S. movies China would accept into its cinemas and when and how the titles could be released to how much Hollywood studios ultimately could take home — expired in February. Officials from the two nations are now at work on a new agreement, with the U.S. side pushing for greater market access and a fairer playing field, and the Chinese looking to safeguard the healthy development of their homegrown industry.